Franchise Agreement in Turkey

I. What is a Franchise Agreement?

A franchise is a system for using practical knowledge and industrial rights acquired over time and experience. Franchising involves granting a well-known brand and established image to an independent investor within certain standards and for a fee.

The parties to a franchise agreement are the franchisor and the franchisee. Franchisor provides the franchisee with intangible assets such as distribution, operation, and marketing systems, know-how, brand, trade name, and promotional elements of the business. The franchisee, in turn, operates under their own name and account, increases the sales of the goods and services subject to the agreement, supports and adheres to instructions, and pays a fee.

In a franchise agreement, the primary obligations of the franchisor are to incorporate the franchisee into the franchising system, support them, and assist them. The franchisee’s obligations include paying fees and carrying out activities to increase the sales of the services.

According to the Court of Cassation, the definition of a franchise agreement is: “A long-term and continuous business relationship arising from the franchise right granted by one party, which involves providing information and support regarding the management and organization of the business under certain conditions and restrictions for a specified period to the second party, thereby creating a contractual relationship between two independent parties.”

The agreement establishes a continuous relationship between the parties. Through franchising, the franchisor expands their network. The franchisor is the owner of the business system that has achieved a certain standard and success with its products. Other party to the agreement is the franchisee, who operates independently but is bound to the franchisor in internal operations while being granted the privilege of using the elements within the system. The franchisee is strictly bound by the franchisor’s instructions within the scope of the franchise activity.

II. Formation and Elements of a Franchise Agreement

A franchise agreement is a contract that imposes obligations on both parties. It is established through the mutual and compatible expressions of intent from the parties involved. This agreement is not specifically regulated by law. It includes permission for the use of intangible assets such as the business name, brand, and promotional elements in the franchising system owned by the franchisor. It also encompasses elements related to licensing agreements. The sections related to licensing agreement obligations must be in writing. Therefore, to be valid, the franchise agreement must also be in written form.

A franchise agreement is a framework and standard contract involving a continuous obligation relationship. The elements of the agreement include:

• The franchisee operates under their own name and account,
• The comprehensive set of obligations included in the franchising system,
• Vertical cooperation established to increase sales due to the parties being at different economic levels,
• Image integrity,
• Non-compete obligation,
• The fee paid by the franchisee in exchange for being included in and using the system.

The franchisee is a separate and independent merchant from the franchisor. They provide the capital and assume the risks. In the franchise system, aspects such as the supply of goods or services, standards, pricing, business equipment, and staff uniforms are predetermined.

One of the most important parts of the agreement is the use of intangible assets. Intangible assets include:

• Brand,
• Business Name,
• Emblem,
• Symbol,
• Business Decor,
• Know-How and other distinctive features of the business.

III. Types of Franchise Agreements

1. Product Franchise vs. Business Format Franchise Agreements

Product Franchise Agreement: This type of agreement grants the franchisee the right to use intangible assets, with the franchisee agreeing to sell the franchisor’s goods in return. The core element is the use of the brand or trade name. The franchisor produces the products, and the franchisor’s control and oversight are more stringent. Examples include car dealerships and gas stations.

Business Format Franchise Agreement: This agreement involves the franchisee adopting a comprehensive business system, including the use of all intangible assets, and is part of the franchisor’s network. The franchisor provides support in areas such as training, management, accounting, and control. In a product franchise agreement, the franchisee has more freedom regarding business management, while in a business format franchise agreement, control is primarily in the hands of the franchisor. Examples include fast food chains.

2. Product, Service, and Manufacturing Franchise Agreements

Product Franchise Agreement: This type of agreement involves the franchisee distributing specific goods. The franchisee acquires these goods from the franchisor or a third party designated by the franchisor. The distribution must adhere to the franchisor’s control and operational standards. Franchisee is also responsible for informing consumers about the products and providing post-sale support. Cosmetic sales companies are an example.

Service Franchise Agreement: In this agreement, the franchisee provides a service in accordance with the franchisor’s operational standards and instructions. In addition to service provision, certain goods may also be manufactured by the franchisee. The franchisee directly provides the service to the customers benefiting from the goods and services. Hair salons are an example.

Manufacturing Franchise Agreement: This agreement involves the franchisee purchasing the raw materials needed for manufacturing from the franchisor or a designated third party. The franchisee is responsible for producing and distributing the manufactured goods. Coca-Cola is an example of this type of franchise agreement.

3. Manufacturer-Retailer-Wholesaler Franchise Agreements

Manufacturer-Retailer Franchise Agreement: In this type of agreement, the franchisor is a manufacturer who grants the right to sell products to a franchisee retailer under the franchisor’s operational system. The franchisor’s obligation is to produce and supply the goods, while the franchisee’s obligation is to distribute these goods.

Manufacturer-Wholesaler Franchise Agreement: If the franchisee operates as a wholesaler, this agreement is in place. The franchisee learns technical details such as trade secrets and know-how related to production from the franchisor. The franchisee then manufactures the products and sells them to retailers. In this model, the manufacturer supplies raw materials or concentrates to the wholesalers, who then complete the final product and manage its distribution.

Retailer-Retailer Franchise Agreement: When both parties in the agreement are retailers, this type of franchise agreement applies. The franchisor, who is a retailer, includes another retailer in their system to expand their network.

4. Subsidiary Franchise and Master Franchise Agreements

Subsidiary Franchise Agreement: The franchisor may establish franchise agreements directly or through its subsidiaries. When the agreement is made through subsidiaries, the actual owner of the business system and intangible assets remains the main franchisor company. However, in the agreement, the franchisor is represented by the subsidiary company. This creates a sub-franchisor relationship.

Master Franchise Agreement: In this type of agreement, the franchisor delegates the authority to create national or international franchise agreements to a third party. The master franchisee is granted the right to establish franchise agreements within a specific country or region and acts as the franchisor for other third parties.

5. Subordination and Partnership Franchise Agreements

Subordination Franchise Agreement: In this type of agreement, the franchisee is subject to the franchisor and the operational system created by the franchisor. There is a hierarchical relationship between the parties, with the franchisee expected to support sales and act in accordance with the franchisor’s directives and interests.

Partnership Franchise Agreement: In this agreement, both parties contribute equally to the management of the system and the development of new strategies. They share equal authority and responsibilities within the franchise arrangement.

IV. Rights and Obligations of the Parties in a Franchise Agreement

1. Franchisor’s Rights and Obligations

A franchise agreement is a mutual contract that imposes obligations on both parties. The primary obligations of the franchisor are:

• Pre-Contractual Disclosure and Information,
• Granting Use of Intangible Assets,
• Protection and Support of the Franchisee,
• Delivery of Necessary Goods and Materials,
• Non-Competition Obligation.

Franchisor must inform the franchisee about:

• The investment amount required for establishing the business,
• The payment methods and schedules,
• Methods for conducting business operations,
• Support and assistance to be provided during the contract,
• Obligations and advertising costs,
• Potential profits and outcomes.

The franchisor is responsible for assisting the franchisee with:

• Property Acquisition or Leasing,
• Regional Analysis,
• Supplier Identification,
• Staffing,
• Credit and Financing Guidance,
• Legal Permits,
• Advertising.

The franchisor must provide necessary training to the franchisee and their staff. Additionally, the franchisor should handle its own advertising and set standards for franchisee advertising. The franchisor may commit not to establish franchise agreements with other parties within a specified area, thereby granting exclusivity. In this case, the franchisor also has an obligation not to enter into franchise agreements with other businesses.

2. Franchisee’s Rights and Obligations

The franchisee’s fundamental obligations are to support sales and pay fees. Fees are divided into three categories: entry fee, periodic fee, and advertising fee. The entry fee is a one-time amount paid by the franchisee to the franchisor in exchange for granting the use of intangible assets and providing support during the establishment of the business, such as finding a location, acquiring equipment, staff training, design, and accounting.

The periodic fee (royalty) is the amount the franchisee must pay for the right to use the franchising system and benefit from the franchisor’s commercial success and other advantages provided by the system. This fee is paid continuously and can be either a one-time payment or installments at specified intervals for ongoing product supply, know-how transfer, and other technical assistance. It is generally determined based on the franchisee’s turnover and paid monthly, typically ranging from 1% to 10%.

The advertising fee is the amount paid to a fund established by the franchisor for collective advertising and marketing expenses, proportional to the franchisee’s turnover. Additionally, the franchisee may be required to allocate a specific amount for advertising and marketing expenses to increase sales in their own region.

If the franchisee fails to fulfill their payment obligations and falls into default, a default notice must be issued. Interest may also be claimed on overdue payments.

The franchisee is obliged to increase the sales of the relevant goods and services by operating in their own name and account. The franchise agreement may include a right of exclusivity and a non-compete obligation during the agreement term. Additionally, a post-agreement non-compete agreement may be made.

The franchisee must use the permitted trade name, business name, brand, patent, know-how, and promotional elements. Actions contrary to this obligation could damage the uniform image or prevent proper sales.

The franchisee must comply with various aspects of the business, including staff employment, staff uniforms, business equipment and appearance, service delivery principles, training, and advertising. There are obligations of non-competition, confidentiality, and information and accountability.

V. Termination of the Franchise Agreement

The franchise agreement constitutes a continuous obligation relationship and can be terminated through dissolution. The parties have an obligation to personally fulfill their duties under the agreement. In the event of the death, loss of capacity, or bankruptcy of one of the parties, if the agreement does not explicitly state otherwise, it will automatically terminate. Additionally, the parties may terminate the agreement at any time through mutual consent.

The agreement can be either for an indefinite term or for a specified period. If a duration is specified in the agreement, it will terminate automatically upon the expiration of that period. If there is a clear extension clause and the specified duration is definite, the agreement will be extended for a certain period after the initial term ends. However, if there is an extension clause but no definite period can be determined, or if the parties continue to perform the agreement after the specified term has ended, the agreement will be considered as having an indefinite term.

Ordinary termination can be executed through a notary, registered mail, telegram, or secure electronic signature. To exercise the right of ordinary termination, the agreement must be of indefinite duration. For fixed-term agreements, ordinary termination is possible only if explicitly provided in the agreement. The notice period for exercising the right of ordinary termination is the termination notice period agreed upon by the parties. If not agreed upon, a six-month notice period is accepted as the ordinary termination period.

The extraordinary termination right allows a party to terminate the agreement if there is a justified reason that varies depending on the specific case. Justified reasons for termination of the franchise agreement are circumstances that make the continuation of the contractual relationship intolerable for the parties. Examples include:

• Violation of the obligation to pay fees by the franchisee,
• Loss of essential personal skills,
• Prolonged economic inefficiency,
• Failure to achieve the specified turnover,
• Conviction of the franchisee,
• Negligence,
• Failure by the franchisee to adequately support sales,
• Unauthorized use or disclosure of know-how,
• Acts constituting unfair competition.

The Court of Cassation indicates that it is possible within the freedom of contract for one party to have unilateral termination rights in a franchise agreement. However, the exercise of this right must comply with the principle of good faith.

VI. Consequences of Termination of the Franchise Agreement

Upon the termination of the franchise agreement, the franchisee is generally obligated to cease using the intangible assets and to return any items delivered to them. One of the most significant consequences of termination is the franchisee’s right to claim compensation.

If the franchisee has receivables from the franchisor, they have the right to retain possession of the items they are obligated to return until these receivables are paid. Even if the agreement has ended, the franchisee must avoid causing harm to the franchisor and should act in a manner that aligns with the franchisor’s interests.

Unless explicitly agreed otherwise in the franchise agreement, there is no obligation for the franchisee to refrain from competition. However, if stipulated in the agreement, the franchisee must comply with any non-compete clauses.

In the event the agreement ends as expected, the franchisee must fulfill all payment obligations. If the agreement ends before the specified term, the fees paid should be refunded to the franchisee. Refunds should be calculated proportionally based on the elapsed time relative to the total contract duration, in accordance with unjust enrichment principles.

During the term of the franchise agreement, if the franchisee’s commercial efforts result in increased market share, a new and stable customer base for the franchisor, and the franchisor continues to benefit from these gains unilaterally after termination, the franchisee may claim compensation for these gains. This compensation request is referred to as customer or portfolio compensation.

The right to compensation cannot be waived by mutual agreement in the franchise agreement. The first condition for claiming compensation is the existence of exclusive rights. Secondly, the franchise agreement must have ended. Compensation cannot be claimed if the agreement is terminated by the franchisee without valid reason or by the franchisor for a valid reason.

The third condition is that the franchisor must have obtained a substantial and lasting benefit or customer base due to the franchisee’s efforts during the agreement. Fourth condition is that the franchisee must suffer a loss of income due to the loss of the customer base after the agreement ends. The franchisee’s income loss is calculated based on the profit from the sales of goods and services. In this case, the loss is determined by assessing the contribution of the customer base relative to the business volume.

The compensation claim must be filed by the franchisee, who must prove that the franchisor has benefited and that the franchisee has suffered a loss. Claim must be filed within one year. The competent court for the case is the commercial court of first instance located in the franchisor’s place of residence.

VII. Applicable Law for International Franchise Agreements

Franchise agreements may involve elements of foreignness. To determine the applicable law for an international franchise agreement, it is first necessary to examine whether the parties have made a choice regarding the applicable law. The parties can specify the law they wish to apply to any disputes arising from the franchise agreement in the contract.

If the parties have not chosen an applicable law, the law with the closest connection to the contract will apply. The law with the closest connection is determined based on the characteristic performance obligations of the parties. The significant obligations are those of the franchisor, who owns the successful distribution system. Therefore, if the parties have not made a choice of law, the law of the place where the franchisor’s business is located will apply.

If the law applicable to the framework franchise agreement has been determined by the parties’ agreement, this law will also apply to any subsequent individual agreements.

Ece Deniz Vardar
Attorney at Law | Lawyer in Turkey

Contact

Call us : +90 212 909 86 34

Send mail : info@ballawfirm.com

whatsApp →